The Importance of Diversifying Your Customer Base
- Brandon Gray
Feb 13, 2024
Exploring the value of diversifying your customer base is crucial. The old adage of not putting all your eggs in one basket remains highly relevant today, despite seeming slightly antiquated. For businesses, relying heavily on a single major client is akin to staking all sales expectations and growth potential on one source. Such dependence places a company's fate directly in the hands of this client. An overreliance on one key client leaves the business with limited control over its future and diminishes its ability to strategize proactively. Should the client face economic difficulties, downturns, or bankruptcy, the dependent business finds itself in a precarious position, often without the means to implement timely corrective measures.
Where’s the Money?
When attracting a large customer, it’s not uncommon for a company to offer the client discounts to secure the business. While providing discounts to existing customers or prospects can boost sales, having just one large client with a discount can cut profits.
Discounts aren’t the only way that a company can lose money and reduce revenues when relying heavily on a single customer. The company may also suffer when the client is slow to pay invoices or when that company’s demands are reduced. The company may have already invested in raw materials, training, and labor. However, there may be no guarantee the discounted order will materialize – or, if it does materialize, that it will be paid.
Customer Base Diversification: Not Just for Investment Accounts
It’s doubtful that any investor would think it a good idea to invest all of his or her money in the stock of just one company. Instead, most investors diversify holdings and invest in several different companies in many different industries to better hedge against losses. In the same way, a company can evaluate its customer base. Management may want to ensure that no one customer comprises more than 25% of the company’s annual revenue. Therefore, a hedge is created against an individual client’s business slowdown, slow payment, or total loss while also balancing customers who pay full price and those who receive discounts.
Position your business for stability and growth by contacting your CRI advisor today. Our skilled team specializes in analyzing customer base diversification and providing customized guidance to mitigate risks. With our insights and expertise, you’ll be equipped to handle market complexities and protect your business from the vulnerabilities of depending too heavily on a single client.